Personal Finance 101: What Is a Money Market Account?

If you’ve run across the term “money market account” at your bank, you’ve probably wondered what it means. While it might sound kind of imposing, a money market account, or MMA, is very similar to a savings account.

The biggest benefit to a MMA over a savings account, however, is that interest rates and terms are usually far superior. But, what other differences set these accounts apart? And should you consider a traditional savings account instead? Read on to find out.

What is a money market account?

First, let’s talk about what truly sets an MMA apart from a savings account. By and large, the biggest difference is what the bank can do with the money you deposit wither either account. When you put money in a savings account, the bank is limited to making loans with that cash. If you put it in a money market account, however, the bank can actually put it into low-risk investments such as certificates of deposit or government securities.
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Of course, that probably doesn’t matter much to you. If it does, it shouldn’t: Whatever the bank does with your money, whether it’s in a savings account or an MMA, your deposit is insured against losses by the Federal Deposit Insurance Corp. up to federal limits. So let’s take a look at some more practical attributes of MMAs, and how those differ from savings accounts and another place you may be thinking of stashing your money, CDs.

Money Market Accounts vs. Savings Accounts vs. CDs

Savings

MMA

CD

Transaction limits?

No more than 6 certain types of withdrawals/transfers per statement cycle

No more than 6 certain types of withdrawals/transfers per statement cycle

Any withdrawals before term is up are subject to early-withdrawal penalties

Minimum deposit?

Commonly $0 (varies by bank)

Commonly $1,000 or more (varies by bank)

Commonly $1,000 or more (varies by bank)

Check/debit card access?

No

Yes

No

Interest rates

Low

Higher

Highest

Set term for maturity?

No

No

Yes

Transaction limits

Like a savings account, federal regulations prohibit more than six pre-authorized or electronic payments, withdrawals, or outgoing transfers from your MMA. Exceed this, and your bank will likely charge a fee for every over-limit transaction.

However, if you’re thinking about a CD, or certificate of deposit, consider that MMAs and savings accounts are still relatively liquid. That means you can readily access money if you need it. You won’t be able to touch the money you put in a CD before its term is up without facing a stiff early-withdrawal penalty. This term can be as short as a few months or as long as five or more years, with longer terms and larger deposits earning more interest. To learn more about CDs, see What Is a Certificate of Deposit?

Minimum balance

It’s not hard to find a savings account that doesn’t require a minimum balance to open or avoid a monthly maintenance fee. However, it’s more common for an MMA to require a substantial sum, which could be as little as $1,000 or as much as $10,000, for you to open an account and bypass fees.

CDs also usually require a hefty sum to open, but you won’t need to worry about maintaining a minimum balance since you won’t be touching the money until your term is finished.

Interest rates

Your MMA balance earns interest just like a savings account. Generally, MMAs earn a higher yield than savings accounts but a lower yield than CDs. According to the FDIC, the national average annual percentage yield (APY) for an MMA was 0.10% as of March 2018. Savings accounts earned an average of 0.07% APY, and one-year CDs earned an average of 0.32% APY.

Those interest rates are certainly nothing to write home about. Keep in mind that, online, you’ll find higher yields for all of these accounts. In fact, some savings account rates even top MMA rates online.

The situation is similar with CDs. Though CDs usually offer better interest rates than savings accounts and MMAs at local banks, you can find high-yield savings accounts online that best the national averages for CDs by a mile. Unsurprisingly, this means you’ll be better off shopping for CDs online, too.

Keep in mind that you can earn a better return on a CD by putting more money away for a longer term. For more on squeezing the best interest rate out of your CD, see How to Find the Best CD Rates.

Account perks

With an MMA, you’ll typically receive a debit card and checks, making your account easier to access. That’s not the case with a normal savings account or a CD.

How is a money market account different from a money market fund?

Whatever you do, don’t confuse a money market account (MMA) with a money market fund (MMF). The similar names make this an understandable financial gaffe, but MMAs and MMFs are very different.

An MMA is readily available at most banks, and is insured by the FDIC up to federal limits. That means that, even if your bank collapses, you probably won’t lose a dime.

An MMF, on the other hand, is a mutual fund that invests in low-risk securities such as Treasury bills and commercial paper. You’ll probably need to go through a broker to invest in an MMF, which is subject to risk and can decline in value. With an MMF, those are the breaks, and the FDIC won’t be standing by with a check.

Though money market funds all but guarantee that your principal won’t go anywhere by keeping investments very low-risk, they still aren’t a sure thing. During the subprime mortgage bust of 2008, one MMF “broke the buck” and returned only 97 cents on each dollar invested, touching off a panic among MMF investors.

In the end, an MMA will be your best bet if you want a secure, convenient place to park your money while earning a bit of interest. An MMF, on the other hand, could be worth a look if you want to dip a toe into the world of investments while keeping your risk very low.

Who should open an MMA?

Anyone who is considering opening a savings account would also do well to consider an MMA. At the end of the day, both types of accounts are very similar as long as you can meet any minimum deposit requirements.

Here are a few situations where an MMA makes particular sense:

You want an account that’s more liquid than savings, but earns more interest than checking. An MMA can be a happy medium between a no- or low-interest checking account that’s easy to access and a savings account with a bit more interest but no debit card or check-writing privileges.

You want a higher interest rate than you can get with a savings account, but you don’t want to use an online bank. Most brick-and-mortar banks offer MMAs with higher interest rates than what they offer on savings accounts, but they’ll also probably require a higher minimum deposit. Remember, though, that you’ll need to go online for the best interest rates, regardless of which account you choose.

You aren’t willing to part with your money for as long as a CD would require. Locally (and sometimes online) a CD will likely give you the best return, but you’ll have to keep your hands off your money for the entire term (possibly a year or more).

You want the ability to write a few checks. Unlike CDs and even traditional savings accounts, most MMAs come with a book of checks you can use to access your money quickly. If you want the ability to tap into your account in a pinch, having checks on-hand is a smart move.

If you think an MMA is the way to go, be sure to check out our guide to the Best Money Market Account for 2019. You can also start by checking out interest rates online with the tool below.

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